1) Use the base case assumptions (pg. 4) as well as the information presented in the case to build a four-year discounted cash flow model for Advanced Seal given a 50% Cannibalization rate for the Premium Product and a 15% Cannibalization rate for the Basic Product. What are your NPV and IRR results? Please use the Basic Template from the Excel file provided for the project. (15 pts)

2) Calculate (1) again using a 55% Cannibalization for the Premium Product and a 15% Cannibalization rate for the Basic Product. Show your NPV and IRR results. Also, calculate (1) again using a 60% Cannibalization rate for the Premium Product and a 15% Cannibalization rate for the Basic Product. Show your NPV and IRR results. (10 pts)

3) Use the model developed in (1) to test the implications of Christina Whitmans Proposal to Drive Revenue" (pg. 5). Please use a 50% Cannibalization rate for the Premium Product and a 15% Cannibalization rate for the Basic Product. Show your NPV and IRR results. Now, repeat this step but use

• a 57.5% Cannibalization rate for the Premium Product and a 15% Cannibalization rate for the Basic Product. Show your NPV and IRR results.
• a 65% Cannibalization rate for the Premium Product and a 15% Cannibalization rate for the Basic Product. Show your NPV and IRR results (15 pts)

4) Use the model developed in (1) to test the implications of Margaret Tans Proposal to Minimize Cannibalization (i.e. raising the price to $23 dollar and minimize the Cannibalization rate to 45% - pg. 6) Show your NPV and IRR results. (5 pts)

5) Going back to the base case (Questions (1) & (2)), assuming for base case there is a 30% probability for a 50% Cannibalization rate for the Premium Product, a 40% probability for a 55% Cannibalization rate for the Premium Product, and a 30% probability for a 60% Cannibalization rate for the Premium Product - calculate Expected NPV, Standard Deviation of NPV, and Coefficient of Variation of NPV. Assuming P&G generally accepts projects with a Coefficient of Variation range between 0.3 to 0.5, should P&G accept the Premium Product?

Going back to Christina Whitmans Proposal to Drive Revenue" (Question (3), assuming for Proposal to Drive Revenue" there is a 40% probability for a 50% Cannibalization rate for the Premium Product, a 35% probability for a 57.5% Cannibalization rate for the Premium Product, and a 25% probability for a 65% Cannibalization rate for the Premium Product - calculate Expected NPV, Standard Deviation of NPV, and Coefficient of Variation of NPV. Assuming P& generally accepts projects with a Coefficient of Variation range between 0.3 to 0.5, should P&G accept the New Product now? (15 pts)

(6) Monte Carlo Simulation Analysis - Conduct a 1,000 trial Monte Carlo simulation using the base case (Question (1)) and the following assumption:

Normal distribution for Cannibalization rate of the Premium Product :

o Mean = 50%, Standard deviation = 5%

Normal distribution for Per unit revenue of the New Product

o Mean = $23, Standard deviation = $2

Report the following statistics from your trial: Mean, Standard deviation, Median, Probability of NPV > 0, Coefficient of Variation. Also, provide a Histogram of your simulated NPV.

Assuming P&G generally accepts projects with a Coefficient of Variation range between 0.3 to 0.5, should P&G accept the New Product now given your simulation results ? (15 pts)

Hint:

1. Cannibalization of 50% => - 50% * 2,000,000 = -1,000,000 (i.e. reduce 1 million of Premium Product); same principle applies for the Basic Product.
2. You can set Net Working Capital Turnover to run at a rate of 9 (average is 8 to 10 times). Footnote 4: Net Working Capital = Incremental Revenue/ Net Working Capital Turnover.
3. The Depreciation expense is based on the Depreciation Schedule in Footnote 3.
4. The Terminal Value for the Capital expenditure is calculated as the tax shield of the remaining book value times the tax rate.

The above template is filled out correctly. Please use it to answer the questions while providing correct calculations and formulas used. Thank you

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THE PROCTER AND GAMBLE COMPANY: CREST WHITESTRIPS ADVANCED SEAL Discounted Cash Flow Valuation Assumptions Advanced Seal Premium Product Basic Product Per unit revenue and costs Revenue COGS Gross profit Cannibalization rate $22 $12 $10 45.00% $18 $7 $11 50% $13 $6 $6 15% Year 0 Volume Adv Seal Premium Basic Incremental Year 1 2000 -1,000 -300 700 Year 2 2000 -1,000 -300 700 Year 3 2000 -1,000 -300 700 Year 4 2000 -1,000 -300 700 SG&A expenses Advertising (Adv Seal) Foregone advertising (Prem + Basic) 1,000 6,000 4,000 1,000 6,000 4,000 1,000 6,000 4,000 1,000 6,000 4,000 Capital investment Startup costs 4,000 1,500 1,500 Startup costs Depreciation schedule Net working capital turnover Tax rate Discount rate 20.0% 9.0 40% 8% 32.0% 9.0 40% 8% 19.2% 9.0 40% 8% 11.5% 9.0 40% 8% 40% 8% Revenve Adv Seal Premium-Basic Incremental revenue 44,000 -21,900 22,100 44,000 -21,900 22,100 44,000 -21,900 22,100 44,000 -21,900 22,100 Gross profit Adv Seal Premium-Basic Incremental gross profit 20,000 -13.100 6,900 20,000 -13.100 6,900 20,000 -13.100 6,900 20,000 -13.100 6,900 1,500 Incremental advertising exp SG&A expenses Depreciation Incremental EBIT Taxes NOPAT 2,000 1,000 800 3,100 1.240 1,860 -1,500 -600 -900 2,000 1,000 1.280 2,620 1.048 1,572 2,000 1,000 768 3,132 1.253 1,879 2,000 1,000 460 3,439 1.376 2,064 Net working capital Net PP&E 0 4,000 2,456 3,200 2,456 1,920 2,456 1,152 2,456 691 Free Cash Flow NOPAT +Depreciation -900 1,860 800 1,572 1.280 1.879 768 2,064 460 -900 1,860 800 1,572 1,280 1,879 768 2,064 460 Free Cash Flow NOPAT + Depreciation - Capital expenditures - Investment in NWC Free cash flow 4,000 2.456 -7,356 0 2,660 -2.456 4,980 2.852 2,647 NPV 3,314 24.9% IRR THE PROCTER AND GAMBLE COMPANY: CREST WHITESTRIPS ADVANCED SEAL Discounted Cash Flow Valuation Assumptions Advanced Seal Premium Product Basic Product Per unit revenue and costs Revenue COGS Gross profit Cannibalization rate $22 $12 $10 45.00% $18 $7 $11 50% $13 $6 $6 15% Year 0 Volume Adv Seal Premium Basic Incremental Year 1 2000 -1,000 -300 700 Year 2 2000 -1,000 -300 700 Year 3 2000 -1,000 -300 700 Year 4 2000 -1,000 -300 700 SG&A expenses Advertising (Adv Seal) Foregone advertising (Prem + Basic) 1,000 6,000 4,000 1,000 6,000 4,000 1,000 6,000 4,000 1,000 6,000 4,000 Capital investment Startup costs 4,000 1,500 1,500 Startup costs Depreciation schedule Net working capital turnover Tax rate Discount rate 20.0% 9.0 40% 8% 32.0% 9.0 40% 8% 19.2% 9.0 40% 8% 11.5% 9.0 40% 8% 40% 8% Revenve Adv Seal Premium-Basic Incremental revenue 44,000 -21,900 22,100 44,000 -21,900 22,100 44,000 -21,900 22,100 44,000 -21,900 22,100 Gross profit Adv Seal Premium-Basic Incremental gross profit 20,000 -13.100 6,900 20,000 -13.100 6,900 20,000 -13.100 6,900 20,000 -13.100 6,900 1,500 Incremental advertising exp SG&A expenses Depreciation Incremental EBIT Taxes NOPAT 2,000 1,000 800 3,100 1.240 1,860 -1,500 -600 -900 2,000 1,000 1.280 2,620 1.048 1,572 2,000 1,000 768 3,132 1.253 1,879 2,000 1,000 460 3,439 1.376 2,064 Net working capital Net PP&E 0 4,000 2,456 3,200 2,456 1,920 2,456 1,152 2,456 691 Free Cash Flow NOPAT +Depreciation -900 1,860 800 1,572 1.280 1.879 768 2,064 460 -900 1,860 800 1,572 1,280 1,879 768 2,064 460 Free Cash Flow NOPAT + Depreciation - Capital expenditures - Investment in NWC Free cash flow 4,000 2.456 -7,356 0 2,660 -2.456 4,980 2.852 2,647 NPV 3,314 24.9% IRR